Corporate Fixed Deposits: What are the Features of a Corporate Fixed Deposit Scheme?

Corporate Fixed Deposits: What are the Features of a Corporate Fixed Deposit Scheme?
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Corporate Fixed Deposits: An Overview

Fixed Deposits are one of the most popular ways to save money in India. They are a secure investment that provides decent returns and is simple to open. They are a popular financial strategy for risk-averse individuals looking for a long-term investment. Such an investment will yield assured profits. However, depending on the issuing institution, FDs can be quite flexible in terms of tenure, investment, risk, and other criteria.

Corporates and banks both sell FDs to investors on various terms. If you're unsure whether to invest in a corporate FD or a bank FD, keep reading to know more about Corporate Fixed Deposits. Also, before we delve into the important fundamentals of this unique type of FD in India, let us take a look at what a fixed deposit is.

What is a Fixed Deposit?

In a Fixed Deposit, individuals can deposit a lump sum into their bank for a certain period of time at an agreed-upon rate of interest. They are entitled to receive the principal amount invested and additionally the compound interest at the end of the term. Interest rates on FDs are established when the deposit is opened, and the rate is determined by the duration one chooses to retain it. 

Fixed deposits provide assured returns. In contrast to market-led investments, where returns fluctuate over time, the returns on an FD are fixed when the account is opened. Even if interest rates decline after creating a Fixed Deposit, the investor will still get the initially agreed upon interest rate. FDs are regarded far safer than other types of investments, such as shares.

The interest rate and kind of deposit one picks will determine the kind of return on the Fixed Deposit. Individuals may choose between a monthly or quarterly interest payment or reinvestment, which gives them the benefit of compounding.

What is a Corporate Fixed Deposit?

A Corporate fixed deposit (FD) is a term deposit that is kept for a certain amount of time at a predetermined rate of interest. Financial and non-banking financial companies (NBFCs) both provide company fixed deposits. Fixed deposits issued by companies might have maturity periods ranging from a few months to a few years.

Choose from a variety of corporate fixed deposit alternatives with varied tenures, interest rates, and institutions to meet your investment requirements. A wide selection of AAA and AA-rated Company Fixed Deposits provide solid returns with substantially lower volatility.

It is advised to consider these aspects before investing in Corporate FD plans:

  • Credit Rating: Choose higher-rated corporate FDs depending on their credit rating, which shows the company's underlying risk.
  • Business Background: Examine a company's commercial viability using its financial statements, management discussion and analysis, and other documents (MD&A).
  • Repayment History: A company's repayment history influences its credit score, reputation, and stability.

Documents Required for Corporate FD

Documents required to open a corporate fixed deposit:

  • KYC documents and address proof of the applicant. These include identity proofs such as Voter ID Card, Driving Licenses, etc.
  • Electricity bill, telephone bill, bank statement with the account number, IFSC code, etc.

Documents Required for after opening Corporate FDs:

The following documents must be submitted after opening the corporate fixed deposits:

  • Copies of all cheques issued from the bank branch from where funds have been raised
  • Bank statements covering a minimum period of 3 months before applying, along with details of all withdrawals made during that period
  • Copy of Form 29A or Form 29B (as applicable) along with declaration duly signed by a concerned person who has opened this account in terms of RBI Circular dated 22nd August 2011

The letter issued by the company to its bank authorizes them to make payments in case of any dues payable by the company. A declaration signed by the authorized signatory on behalf of the company states that no other fixed deposits have been opened in any other bank/financial institution in India or overseas for one year before applying for opening this account.

Eligibility Criteria for Corporate/Company FD

The eligibility criteria for Corporate/Company FDs are as follows:

  • Companies registered under the Companies Act, 1956.
  • Any public limited company or private limited company.
  • Any unincorporated entity which is not a partnership firm.
  • Any firm registered under the Partnership Act, 1932.
  • Limited liability partnership (LLP).

Any cooperative society registered under the Cooperative Societies Act, 2002. Any undivided Hindu family (HUF) as defined in Section 3 of the Income Tax Act, 1961. Any company not covered by any of the above categories.

Any other entity which is not covered by any of the above categories.

Individual FDs are as follows: Any individual citizen of India who has attained the age of 18 years and is not a minor, lunatic, or a person of unsound mind. Any foreign citizen who does not have a PAN card issued by the Income Tax Department. Any person of Indian origin (PIO) who has been living outside India for over 182 days in a year and does not have an Aadhaar card issued by the UIDAI.

Taxation process for Corporate/Company FD

It is best not to get surprised by a large tax bill at the end of the year. That's why it's important to know what you're paying now and how your FD will affect your taxes in the future.

If you're depositing money into an FD account, interest earned on corporate/company fixed deposits is subject to tax under Section 194B of the Income Tax Act, 1961.

When it comes time to withdraw funds from your fixed deposit, there are some things you need to keep in mind:

  • Interest earned on maturity: The amount earned on maturity will not be taxed if 100% or more of the principal amount is withdrawn before the completion of one year since the commencement date. If less than 100% of the principal amount is withdrawn before the completion of one year since the commencement date, then only a 60% exemption under section 194B would apply. In comparison, 40% would be taxable per the marginal rate applicable when income accrues from such withdrawal.
  • Interest earned on premature withdrawal (before maturity): 90% exemption under section 194B would apply if all amounts due on premature were deposited within 30 days from such premature withdrawal for new fixation; this also includes partial withdrawals made during the first six months period after fixing deposit but does not include any partial withdrawals made after expiry up till complete maturity period. If any part remains undeposited after expiry until the entire maturity period, then only a 60% exemption under section 194B would apply. In comparison, 40% would be taxable as per the marginal rate applicable at that particular time when income accrues from such withdrawal.

Features of Corporate Fixed Deposit

  • Corporate FD comes with a credit rating (such as AAA) from reputable rating organizations like CRISIL, ICRA, and CARE. The rating indicates a high probability of default in interest and principal payments and so assists depositors in determining the financial institution's creditworthiness.
  • Depositors can pick from a variety of interest pay-out alternatives provided by NBFCs/HFCs based on their needs. There are monthly, quarterly, half-yearly, and annual pay-out choices available. Depositors can also pick the cumulative FD option, in which the interest component is reinvested, enhancing the power of compounding. As a result, the cumulative option would assist the depositor in earning better returns than non-cumulative options.
  • Depositors might also request a premature withdrawal from the company. Most HFCs and NBFCs charge a penalty rate (up to 2%) on public deposits. However, certain public deposits have a three-month lock-in term during which deposits cannot be withdrawn.
  • Loans against Corporate FDs are also available to depositors in both cumulative and non-cumulative FD schemes. However, some financial institutions levy a 2% premium over the maximum corporate fixed deposit interest rate.
  • The interest income received on corporate fixed deposits is taxed according to the depositor's tax bracket. Also, Corporate fixed deposits are riskier than bank fixed deposits, since they are not insured by the deposit insurance scheme offered by DICGC, an RBI subsidiary.

Best Corporate Fixed Deposit Schemes to Invest

The following table reflects some of the best corporate fixed deposit schemes available in the market:

Company NameCredit RatingInterest Rates (% p.a.)Additional interest rate for senior citizens (% p.a.)

1-year

tenure

3-year

tenure

5-year

tenure

Manipal Housing Finance Syndicate LtdCARE- BBB+7.757.757.25
Kerala Transport Development Finance Corporation Ltd.Guaranteed by Kerala Govt.7.07.06.750.25
Shriram Transport Finance Co. Ltd.

ICRA-AA+/Stable

IND AA+/Stable

6.547.727.950.5
Shriram City Union Finance Co. Ltd.ICRA-MAA+/Stable Outlook6.547.727.950.5
PNB Housing Finance Ltd.

CRISIL-FAA+/Negative

CARE-AA/Stable

6.57.257.30.25

HDFC Ltd.


 

CRISIL-AAA

ICRA-AAA

6.06.76.80.25
Sundaram Home FinanceICRA-AAA/Stable6.06.657.00.5
Muthoot Capital Services LimitedCRISIL-FA+/Stable6.256.757.250.25
Bajaj Finance Limited

CRISIL-AAA/Stable

ICRA-AAA/Stable

6.27.47.40.25
LIC Housing Finance Ltd.CRISIL-AAA/Stable5.956.656.950.25
ICICI Home Finance

CRISIL-AAA/Stable

ICRA-AAA/Stable

CARE-AAA/Stable

5.256.76.90.25

Corporate FDs offer a terrific opportunity for individuals seeking better profits, and they also diversify the investment. They provide better returns than bank FDs. They may be compared on operational and rating criteria, making it easier to select a suitable corporate FD candidate.

Several corporations provide Fixed Deposits, but not all of them give the same interest rate. They vary, and the marginal difference can be significant. Before investing, it is advisable to compare corporates and see whether they have higher CARE, CRISIL, and ICRA ratings. AAA is the highest possible rating. 

Most investors only pay attention to the rating system. Investors should look at the company's track record, including its profit and loss records. If the loss is a one-time or rare situation, then the track record is generally favorable. It might be an excellent investment option for corporate FDs. Furthermore, it is a good habit to be aware of the company's intentions and to assess if they will have a positive or negative overall impact. Following this can help you achieve great results while maintaining the risk-reward ratio.

  • What is the procedure of a premature withdrawal of a Corporate Fixed Deposit?

  • What are the documents required for opening a Corporate fixed deposit?

  • Are Corporate Fixed Deposits a good investment?

  • What is the difference between FD and corporate FD?

  • What is the tenure for corporate fixed deposits?

  • Is corporate FD taxable?

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